Lawrence Solomon: State enterprises in a lawless world

Without billions in subsidies, Western ­corporations wouldn’t invest as much in risky regions

Most Canadians and Americans understand that state-owned corporations from thuggish countries such as China don’t make for a good fit in market-oriented democracies such as ours. The flip side of this view — that our private-sector corporations don’t make for a good fit in thuggish jurisdictions — applies equally well. We should not only impede a China-owned CNOOC that would distort the free marketplace with government-subsidized capital; we should also not spur our private-sector multinationals through subsidies of our own to enter dodgy foreign jurisdictions. If Western multinationals invested less in thuggish jurisdictions, they would invest more in free-market jurisdictions, promoting good government as a byproduct.

Many North Americans abhor political interference in business — this is a prime reason to prevent an investment by a Chinese company. Although our industries could benefit from foreign capital, the fear that CNOOC might serve some Chinese agenda tips the scales against approval. But the scales tip in the other direction when the investment takes place in a jurisdiction fraught with risks. There, political or geopolitical potency can be a business advantage, making state-owned corporations more attractive investors than private corporations.

A case in point is Israel’s Delek Group, which has received bids from foreign investors seeking a share of its vast Leviathan gas field in the Mediterranean. The names of the foreign bidders are being kept secret by special dispensation from the Israeli Securities Authority — the foreign companies want to avoid the wrath of the Arab world should they fail to win the bid — but they are rumoured to include blue-chip private-sector American firms such as ExxonMobil, as well as companies in France, Australia, and elsewhere. The corporation rumoured to have the inside track in winning the bid, however, is Gazprom Israel, a subsidiary of Russia’s Gazprom, the world’s largest natural gas company.

Unlike the Western companies, Gazprom doesn’t need to walk on eggshells in dealing with Arab countries: Neither it nor its government masters bows to anyone, certainly not to Middle East regimes that often require Russian arms to remain in power and often need Russian diplomatic support to escape UN sanction. Russia’s relationship with states throughout the Middle East, including state sponsors of terror such as Syria and Iran, is no-nonsense and all business. As Russian President Vladimir Putin told Spain’s former prime minister Jose Maria Aznar several years ago in a discussion about Russian arms sales to Israel’s enemy, Iran: “Don’t worry — I, you — we can sell them everything, even if we are worried by an Iranian nuclear bomb, because at the end of the day, Israel will take care of it.”

The Russian government’s hard-nosed attitude and geopolitical clout make Delek Group enthusiastic about partnering with a firm seen as an extension of Russian foreign policy. Israel operates in a tough neighbourhood where its energy infrastructure is under constant threat. Russian intelligence and the Russian warships that ply the Mediterranean would go far in protecting the offshore gas fields. Then there’s confidence that anyone messing with Russian property could expect payback, from either Russia or Gazprom itself, which runs a paramilitary operation with a reputation for ruthlessness.

A Western corporation might be more competent, but competence is trumped by deterrence value — if an American corporation’s property in the Middle East was attacked, the U.S. government’s response would take the form of a diplomatic note of protest, not the assassination of the attacker’s leadership.

Western corporations also operate at a competitive disadvantage when dealing with kleptocracies or human rights violators, as Canada’s Talisman learned after investing in a Sudanese consortium, the Greater Nile Oil production and pipeline project, in 1998. Royalties from the project, naturally enough, went to Sudan’s government, an Islamist regime that relied on oil royalties to finance its brutal, decades-long civil war against mostly Christian and animist separatists. Talisman became subject to pressure from the Canadian government, which issued a report lambasting its indirect financing of the war; from the U.S. government, which threatened to exclude Talisman from U.S. financial markets; from international observers, who claimed Talisman was profiting from lands that the Sudanese government had seized; from NGOs and churches, which organized a divestment campaign against Talisman shares, and from the Presbyterian Church of Sudan, which sued Talisman in an American court. In 2003, a beaten-up Talisman, its reputation eviscerated, sold its interest in the consortium and got out of Sudan.

The other consortium members, subjected to no meaningful international pressure, remained. They included Sinopec, China’s national petroleum company; Petronas, Malaysia’s national oil company; and Sudapet, Sudan’s national petroleum company. The company that bought Talisman’s interest? Oil and Natural Gas Corp., majority owned by the Indian government. These four state-owned enterprises remain in the consortium — unlike private-sector companies, they are well suited to operations in unsavoury jurisdictions. In another example, Canada’s Barrick is now selling its Tanzanian gold mines to a Chinese state-owned enterprise after complaints about human rights violations.

Chinese companies are especially well suited to unsavoury jurisdictions, explaining their growing dominance in the African market. They don’t fret about bribing dictators, moving villagers off their land, environmental assessments, or safety and working conditions. In 2010, when workers at a Zambian copper mine protested, two Chinese managers shot 13 of them. The charges against the managers were later dropped.

Western corporations, lacking the geopolitical clout of a state-owned enterprise from a China or a Russia and subject to damage to their reputations and their pocketbooks, typically seek subsidies from their governments and multilateral agencies such as the World Bank to compensate for the dangers of doing business in lawless settings. Export Development Canada alone provides $25-billion a year in subsidized support to further Canadian exports and investments in Third World countries. Without that $25-billion, and like backing provided by other Western export-promotion and development agencies, investments in risky countries would often seem far less attractive and would often not occur. Meantime, Western companies would view investments in politically stable countries, including their home countries, as more attractive.

There are two investment worlds — one lawless and one not. If all else were equal, the investors from each of these worlds would more often keep to their own.

Financial Post

Lawrence Solomon is executive director of Energy Probe and a founder of Probe International. LawrenceSolomon@nextcity.com

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